Strengthening families through tax reform

Here’s a safe bet: The 2016 Republican presidential nominee will push a splashy tax-cut plan. It’s been de rigueur for the party’s standard-bearer since Ronald Reagan in 1980. Gotta check that box.

Okay, but what kind of tax cut? The 2012 nomination race saw a plethora of sweeping but deeply flawed flat-tax plans. All would have exploded the budget deficit, with some also raising taxes on lower-income Americans. Candidates seemed more interested in signaling their supply-side bona fides to primary voters than in offering realistic blueprints for governance.

Mitt Romney’s plan had better math. But despite a 20 percent across-the-board cut in marginal tax rates, it wasn’t clear who, if anyone, would actually bring home higher pay because of the unspecified tax breaks that Romney would have eliminated to pay for the rate cut. Anyone Googling “Romney tax calculator” would have found only a Team Obama app showing how much Romney’s plan would raise middle-class taxes.Among the problems a smart tax-reform plan must consider: a) stagnant GDP and stagnant jobs, b) family incomes 10 percent lower today than before the Great Recession, c) high-end tax rates higher than during the Clinton years, and d) the approaching reversal of falling budget deficits thanks to higher social-insurance spending.

Pro tip for all potential 2016 candidates looking for a tax cut that helps parents, boosts growth, and doesn’t blow up the budget: Give a call to Senator Mike Lee. Last week the Utah Republican introduced the “Family Fairness Tax Reform Plan.” At the proposal’s core is a new $2,500-per-child tax credit — in addition to the existing $1,000 credit — available to all parents of dependent children and applicable to both payroll and income taxes. Under the plan, as Lee figures it, a married couple with two children making $51,000 (the overall median household national income) would see a tax cut of $5,000 per year. The American family is the “ultimate entrepreneurial and investor class,” Lee says. “It is an incubator of economic opportunity, an indicator of economic success, and grows more economically important every day.”

Now a cynic might describe the Lee plan, based on a 2010 National Affairs proposal from economist Robert Stein, as a laughably transparent attempt to make middle-class families into loyal political clients. Instead of crony capitalism, this is crony familialism. And certainly some contenders might see the plan merely as a way of connecting with social conservatives.

But think about the economic logic. Parents contribute twice to social-insurance programs: first when they contribute payroll taxes, then again when they incur the cost of raising the next generation of taxpayers. The Lee plan increases fairness because it helps to offset that penalty. (Wonks would say the tax relief allows parents to recapture more of their economic investment in their kiddies.)

But the “fairness” issue in itself is insufficient to justify the tax offsets, including limiting the mortgage-interest deduction to $300,000 worth of principal (the current limit is $1 million) and the elimination of the state and local deduction. As Stein told me recently, high-income, childless taxpayers in blue states are “going to pay a boatload more in taxes.” But fairness plus the promotion of growth makes the Lee plan compelling.

Where’s the growth? Well, the Lee plan would lower the top marginal tax rate back to 35 percent — it recently rose from 35 to 39.6 percent — and Stein recommends pairing it with corporate-tax reform. But expanding the child tax credit is itself a supply-side move. While an expanded credit wouldn’t nudge many middle-income parents to have more kids than they desire, it might make it easier for them to have as many kids as they desire. That means a higher fertility rate, Stein says, which would help finance Medicare and Social Security without raising taxes. A younger society with a growing population is also one that’s more dynamic, creative, and entrepreneurial. Ask Japan and Old Europe how an aging, shrinking population retards growth.

But, bottom line: Raising kids is an investment in America’s future just as much as buying new machinery for a business is. “Some people say, ‘Well, maybe we shouldn’t allow expensing of plant equipment,’” Stein says. “And I think that’s kind of ridiculous. It’s an investment, just like raising kids is an investment. And we ought to treat them roughly equally.”

So time for a “human capital”–gains tax cut — and a Republican agenda that seeks to strengthen American families.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.